Celldex: An Immuno-Oncology Play With Monster Potential [View article]

Much of this discussion, like discussion about other hot small-mid cap biotech stocks, is focused on the stock itself rather than the space. The problem I see here is that we are all "the suckers at the poker table"--we are disadvantaged vis-à-vis big pharma/biotech acquirers and specialty shops like Baker Bros. when it comes to picking the small number of future winners (out of a huge pool of likely failures) in this space. People talk about XYZ being the next AMGN or DNA while ignoring the vast number of also-ran losers--this is classic survivorship bias.

That's why valuation matters so much--you want to buy a basket of these when they're out-of-favor rather than after they've had a huge parabolic run and are white-hot. Otherwise, you're likely to get poor returns unless you're lucky enough to pick the few winners.

Recent take-out winner PCYC is a great example of this. It's being acquired for around 255. If you had bought it around the height of the last biotech bubble in 2000, you would now have made, depending on timing, 3x-5x of your purchase price over a 15-yr period. Not bad. However, only a small number of these development-stage companies make it or are acquired--most end up being big wipe-outs for their investors. If you bought a basket of these types of companies in 2000, it's unlikely that a 300-500% return on a couple of them would make up for the dozens that went down 80-100% (not to mention your cost-of-capital / time value of money over 15 yrs). Note that even CLDX, while still in the game and hot lately, is still down 80% from 2000--and I'm sure it looked very promising in 2000.

Alternatively, if you had bought PCYC during a period when biotech was out-of-favor (rather than when it was hot), you would have gains of as much as 200-300x over an even smaller number of years. This is likely more than adequate to offset the numerous losers and wipe-outs, and you would have a truly outstanding return.

Price/valuation matters (it protects you from the numerous unknowable risks), and we're currently more like 2000 (if not higher) with development-stage biotech valuations.

Celldex: An Immuno-Oncology Play With Monster Potential [View article]

OK, but it seems as though you're making the past 18 months of strong price action out to be a CLDX-specific story. Nearly all of the spec biotechs have surged around the same time. CLDX may or may not have great prospects, but that action tells me something else is at play.

Also, on 2007-08 events, note that CLDX consistently declined for nearly 20 years prior to that point. What were the excuses during that 20 years?

Maybe CLDX will be the next AMGN or DNA, but it's hard to believe that the many dozens of mid-cap biotechs following a similar price trajectory over the past 18 months will all blossom accordingly.

Celldex: An Immuno-Oncology Play With Monster Potential [View article]

Honest question: CLDX has been public for 25 years, and has been consistently destroying shareholder capital the entire time (the stock is in a steady 25-yr downtrend), with the stock price every 6-8 years punctuated by a short-lived burst of speculative enthusiasm that quickly burns itself out.

What makes "this time different" with regard to CLDX considering how the other bursts of enthusiasm in the share price have ended?

On a related note, if this is all about a sudden revolution in the prospects for the biotech industry over the past 18 months, why is it that speculative, small-cap cash-burning companies in a wide variety of industries suddenly all burst to life around the same time beginning in 2013? Is this just a wild coincidence, or is it evidence of a market mania / speculative bubble in the capital markets rather than some independent miraculous turn in the prospects for small-cap biotech companies? Did the science suddenly make a quantum leap 18 months ago? Were their prospects really that much poorer three years ago than they are now?

The problem is that most of the biotechs in the XBI don't have any meaningful revenue / profits so pricing power isn't really the dynamic at play. What's in play are loose financial conditions (they enable cap-markets-driven roll-up acquisitions at outrageous prices by the likes of Valeant, Endo, Abb-vie, etc. as well as secondary offerings by the biotechs themselves) and a speculative, risk-embracing market mood that awards sky-high valuations based on "hope" and perceived growth potential and/or takeover possibility.

If we get a deflationary collapse, the cap markets will collapse and so will anything that is "hot", speculative and trading at high valuations (including most biotechs).

Even for the larger, profitable biotechs, I would be careful in assuming that they have firm pricing power--note the recent concerns with Gilead's Hep C drugs--pricing power by large buyers and competition from other biotechs.

XBI is all small and mid-cap biotechs which are most assuredly in a speculative bubble. Take a look at the long-term (25-year) chart of recent mo-mo fave CLDX. Consistent downward trend (i.e. capital destruction) punctuated by a speculative mania every 6-8 years that enables the company to do secondary share offerings at high prices to stay alive. Yes, there will be a couple of gems in the haystack that manage to do well long-term (just like internet stocks in 1999), but on average, investors in the space will do poorly from current valuations. Why do you think they've all been rushing to do secondary offerings recently?

The non-takeover bait large-caps like GILD, Biogen and AMGN are not so frothy--the rest of the space is very frothy. In a way, this reflects the broader market where the S&P mega-caps are rich but not outrageously so, while the median stock valuation is much higher, and the Russell 2000 is at all-time high valuations.

Also, Leo, "know thyself"--you're on record as having loved Nortel in 1999 and commodity stocks / rare earths in late 2011 and early 2012. That suggest you have an affinity / bias toward things that are coming off of multi-year bull markets and are primed for devastating losses. Think about it.

XBI Is +24.22% YTD And +44.70% For 2014, But What Are The Risks? [View article]

Small-cap biotech is in a speculative bubble the latest round of which has been driven by takeover speculation after the PCYC and Salix takeovers. Haven't you noticed all of the companies doing secondary share offerings over the past month to take advantage of these bubble prices? How about the CEO of momentum-fave PTCT dumping 100% of his holdings recently?

If you want to take a look at how small-cap biotech trades over time, pull up the 30-yr chart of recent mo-mo fave CLDX. Basically, most of them destroy capital over time though every 8-10 yrs, the action is punctuated by a parabolic speculative bubble that subsequently collapses to lower lows. Yes, there may be a couple gems in the haystack, but on the whole, the space is a loser from these elevated valuations. I would avoid (or short, if you're brave) XBI.

What is your view on Gotham / Joel Greenblatt's diversified long-short value strategies? Seems like the perfect prescription for an environment with overvalued equities and overvalued bonds. Eke out a modest return while preserving the optionality value of cash (market neutral = cash) to go long once the big bear market eventually hits.

Off to a weak start this year though as crap tech / spec biotech shorts have soared. Perhaps a good entry point though.

I take it then that you have now "got religion" and believe in the cyclicality of profit margins per GMO / Grantham / Montier? (Note that I do acknowledge the possibility that the equilibrium level of margins might be higher than in decades past due to oligopolistic effects and the shedding of commodity businesses by the S&P 500--though cyclicality is still present).

On the US dollar, taking a longer view, Hussman views it as overvalued vs. euro and yen, much as he pointed out (correctly) in 2001. What say you? I think the weak dollar trade (emerging markets, gold, oil, silver, euro) is where the long-term value is today (while US markets, unless you're doing a Greenblatt-style long-short strategy, is picking up pennies in front of a steam-roller), though it's probably too early, just like in 1999-2000. What say you? Rob Arnott agrees with me.

Retirement Strategy: Is It Time To Panic Based Upon The Most Widely Used Valuation Metric? [View article]

Broadly speaking, valuations are lower for the mega-caps than for the average stock--that's why the market cap-weighted S&P 500 dramatically outperformed equal-weighted indices, the Russell 2000, etc. last year. Small-cap valuation multiples are at an all-time high much like junk bonds were until recently.

However, even mega-cap multiples are still historically quite high particularly when adjusted for cyclically-elevated margins. Margins are most definitely cyclical, and we've likely just hit a cyclical peak. Stocks looked reasonably priced at the 2007 peak as well but also had cyclically toppy margins which disguised the high multiples.

The big thing propelling these markets and sustaining high valuations is ultra-low interest rates and TINA--it's no coincidence that the huge multiple expansion happened in 2013 (continued through 2014) after long-term interest rates collapsed through 2012.

That's what I mean--the gold/silver ratio suggests that we are likely late in the metals bear market and that there will be explosive upside in the metals over the next few years (upside and downside are always explosive in the metals), with silver outperforming gold. Timing is tricky, but I would say that if this is not the bottom, then there's only one more quick leg down (maybe 20% in gold, tops), and that would be a terrific buying opportunity (and now is a good entry point as well, even if we do get that one last flush-out). We may or may not get it. I wouldn't worry about mining fundamentals or whether there's a "reason to rally".

Emerging markets as a group (EEM) were slightly down this year. The relevant macro correlation is gold and emerging markets as an asset class, not individual markets, which may vacillate up and down over limited periods on their individual fundamentals and "stories".

Note that the gold/silver ratio, now at 74, is similar to the 75-80 extreme highs reached the last two ratio peaks (Dec. 2008; late 2002/early 2003). Both of these preceded major bull moves in both metals, and it did not take several years of waiting. Did you see a good reason in Dec. 2008 or early 2003 for silver to explode higher in the near term?

What is intriguing is that these were also close to stock market bottoms. In other words, this period is highly unusual in that US stocks have been acting like Treasury bond proxies the past couple of years (because people are so yield-starved)--rising sharply when they should have fallen.

I think that at some point, we will see a period where metals and emerging markets stocks strongly outperform US stocks. With the consensus convinced that the USD will continue to soar (based on market (mis)-perceptions of large-scale European and unending Japanese QE), it's possible that could happen this year. That would shock a lot of people, just as most missed the huge decline in long rates this year.

"A large drop in oil prices is exceedingly bullish for Chinese equities and US small cap value portfolios."

It's funny, there was a large drop in oil in 1997-98, yet I don't remember that as being a good time for emerging market equities (in the short and intermediate term). Also, the Russell 2000 underperformed the S&P 500 by a whopping 30% in 1998.

Small-cap are undeniably at nose-bleed levels--top 3% of historical valuation levels. If stocks do well next year, they will be led by high-quality large-caps (try QUAL) much like this past year, with small-caps lagging badly.